Namibian investment company Trustco was not thrilled by a recent FM article on its latest financial results. The group released a Sens announcement bemoaning "misleading statements" published by certain media practitioners around the accounting treatment of a reclassification of its properties. Trustco railed against the ill-informed opinions of some commentators who "maliciously labelled" the reclassification unethical.
To recap: in 2014 Trustco bought a company with properties to be developed and sold. These properties were deemed inventory, but a decline in the Namibian property market prompted management to review its plan. Trustco will hold the properties for longer-term capital appreciation and not for short-term development and sale. These assets are now recognised as investment properties rather than inventory. In its accounts, Trustco recognises "deemed sales of inventory" as revenue to the tune of R984m (the fair value of the assets) and states R291m as "deemed cost of sales". The bottom line is that an accounting gain of R693m was recorded, which was pumped through the income statement.
I am happy to ‘rectify’ my overriding scepticism of Trustco, but definitely not without delay. I need to be convinced
Trustco seems to think that raising eyebrows at this huge paper profit transaction is unjustified, and that "any suggestion that Trustco’s property portfolio is overvalued is false". Trustco goes on to remind investors that it regards these properties (about 4,000ha) as the highest-quality land available in Namibia with a fair market value of more than R2.3bn. And here’s the kicker: "It is estimated that these properties will generate cash flows in excess of R40bn in future." That would be prime with a capital P, and rank with some of SA’s plushest suburbs. But most prudent investors recognise that in such value-unlocking endeavours there could be many a slip twixt the cup and the lip (just ask shareholders in Calgro M3 and Balwin). Yet Trustco reckons anything published to the contrary of these facts is published to cause harm to it and its shareholders. The group also maintains that responsible commentators will rectify their misleading statements without delay. I am happy to "rectify" my overriding scepticism of Trustco, but definitely not without delay. I need to be convinced. I trust one thing above all else when it comes to assessing a company: cash flow from operations.
More intriguing plans
Trustco is well within its rights to place any value tag and profit entry it wants on its future property development endeavours. But I cannot look past the unconvincing cash flow statement(s), especially not when the group is going to great lengths for much-needed money. A recent tranche of funding was secured by CEO, founder and main shareholder Quinton van Rooyen selling huge parcels of shares on the open market to provide a loan of over R1bn.
In fact, only days after reprimanding the media, Trustco issued another intriguing plan to secure future funding lines. This entails a warrant agreement with Evo Fund that has the potential to raise over R2bn. Correspondence sent by Trustco shows Evo is the Evolution Financial Group, a Los Angeles-based entity that specialises in alternative investments. The group is headed by Michael Lerch, and has a penchant for investments in Japan.
That said, Evo has a right (not obligation) to exercise warrants on a staggered basis, starting with 20-million shares at 900c a share. The second tranche involves 20-million Trustco shares at R13 a share, and the third for 20-million shares at R22 a share. The fourth tranche issue will be the mother lode for Trustco, with 37.4-million shares to be issued at R30 a share — an exercise that will raise R1.1bn.
This adventurous scheme is not a funding arrangement pursued by too many (if any) JSE counters. The circular — hopefully furnishing more detail on Evo — should be interesting, though the real intrigue will be watching these share price-linked proposals unfolding.
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